China, Trump, and the Future

Estimated reading time: 23 minutes

Matties: How is it in China? What sort of tax rates do the corporations pay? How does that work?

El-Abd: The Chinese are very pragmatic people. They look at it and they say, "We need money." They tax you. Then they realize they're overtaxing you so they give you tax incentives. Right now, they're giving you incentives.

Matties: What sort of incentives do they put out there?

El-Abd: It depends on the company, the deal, how many employees you have and where.

Matties: Back to our manufacturing; I was talking to a fabricator in south China and they were telling me that the government is mandating that they bring in automation before people.

El-Abd: I wouldn't say they’ve mandated it, but they are encouraging automation.

Matties: He was saying it was a law of some sort, a local city law.

El-Abd: Maybe it's a local city law, I don't know.

Matties: He said that part of it he said was traffic. I think it's more to the national strategy of wages.

El-Abd: It’s also environmental. They just announced a few weeks ago that they're banning electric bicycles here. Everybody's upset about it.

Matties: Is it a battery issue?

El-Abd: I don't understand it. Nobody understands it. I was at the electronics show a week ago in Hong Kong and they had electric bicycles there. The guy said, "We're just exporting. We're not selling anything in China because we don't understand this new law." The problem is most of the poorer people need an electric bike to get around. They don't want them on the roads. There's a problem.

Matties: What do you think about our industry in general? What do you see for the next year or so?

El-Abd: Well, Q1 was terrible. We see the uptick over the last two weeks because of what the government regulations have done. It's just like when Janet Yellen plays around with the interest rates. Business will go up or down depending on what she does. I think that it's the same kind of a thing that you have here. Right now, we're seeing an uptick. Is this uptick going to stay? How long is it going to stay? The other thing that we need to consider, whether we believe it or not, is that the American election does play a role in business. Who's going to get elected? If Trump comes in at 40% import taxes, how's that going to affect the business? Trust me, it will affect business. We just don't know. It's very unclear. This is a very unclear year. We knew that it would be flat or a little bit lower than last year because of the election. Now, it's hard to say.

Matties: I know you just opened your new facility, and added quite a bit of square footage, I think. How do you plan for the future then, and strategize for your own business?

El-Abd: It's all about two things: new and advanced technologies and automation. You saw the robots that we have in our booth. We're building those. The customers where we've put them in are very, very happy with them. We see that as being a really big earner for us. One of these cells can replace five people doing soldering on the production floor. We see that growing.

It's all about the next step, the next generation. What new technologies are coming? A company like us, if we're selling robotics and automation, that's going to continue in the service side of the business, servicing all these products that we're putting out there. That's how we plan to continue to grow, with new technology and all of these new processes for building a board. How you build the board is going to change. For example, this is our 30th year with Yamaha, and we have now have launched a new machine, the Zeta machine, which is the fastest machine in the world, 200,000 CPK. We want to take that to the next level and continue to grow.

Matties: It's all about speed, isn't it?

El-Abd: It's all about speed because you need to get the product out to market as quickly as possible. The cycle of an iPhone is that every year you get a new phone. But if you look at the other ones, it's less than six months and they’ve got something else. I think Apple needs to address that issue.

Matties: What about the military market in China? Is that a growing market? Are there a lot of investments coming into the military here?

El-Abd: The military market is very tightly controlled, obviously by the state. To answer the question, it is growing. China is exporting more and more military technology than it's ever done before. Whether they're selling fighter jets or whether they're selling artillery pieces, missiles, airplanes, helicopters, submarines—whatever they're doing. They were not really known as a major exporter. Now, they're a player in the market.

Matties: We've known each other now going on 12–15 years, and in some of our early interviews, you were saying, "Just wait, the quality of their manufacturing is going up." We've really seen that in the last five years.

El-Abd: We underestimate, and by “we” I mean the United States and Europe, and we have always underestimated the Chinese. We say, “It's crap. It's not good. I don't want to buy this Chinese stuff.” At the end of the day, they're learning and they're getting better and better. They're building aircraft and helicopters and selling them. They can't afford to have quality problems and these things crashing or they're never going to sell any. They did sell some twin prop commercial airplanes that didn't do well. They crashed a couple. The foreigners won't touch it. They can't make money unless they fix all these problems.

Matties: You look at every manufacturer, whether it’s German with Volkswagen or Japan with Mitsubishi. They all have issues.

El-Abd: The Chinese are selling their cars, exports. You're not seeing them in America but they're all over the Middle East, Africa, and South America. They're selling their cars. They're eating into a market that was the mainstay of American and European car manufacturers. Their cars are getting better. Remember Korea? Early Hyundai cars and how crappy they used to be? Now, they're world class, quality cars. The Chinese built a competitor to Tesla, Faraday.

Matties: Tesla is trying to sell cars here, but it's at a much lower rate than they anticipated.

El-Abd: As a matter of fact, Elon Musk just fired his management team here and got some new people because he was unhappy that they weren't being aggressive enough in selling. Funnily enough, Hong Kong is the highest density market for Tesla in the world. There are more Tesla cars in Hong Kong per capita than you've ever seen anywhere else. Everybody's got one in Hong Kong. My neighbor has one. I asked him how much he spends on electricity and he said 200 Hong Kong dollars a month. That's it, like $30 U.S. a month in electricity. He has a separate gauge right over his charger. If you look just here, in Shanghai not so much, but in Shenzhen, you have BYD electric taxis or BYD electric police cars. They're doing very, very well. You see them in Hong Kong now, a BYD electric taxi. It's coming.

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